A limited constitutional government calls for a rules-based, freemarket monetary system, not the topsy-turvy fiat dollar that now exists under central banking. This issue of the Cato Journal examines the case for alternatives to central banking and the reforms needed to move toward free-market money.

The more widespread use of body cameras will make it easier for the American public to better understand how police officers do their jobs and under what circumstances they feel that it is necessary to resort to deadly force.

Americans are finally enjoying an improving economy after years of recession and slow growth. The unemployment rate is dropping, the economy is expanding, and public confidence is rising. Surely our economic crisis is behind us. Or is it? In Going for Broke: Deficits, Debt, and the Entitlement Crisis, Cato scholar Michael D. Tanner examines the growing national debt and its dire implications for our future and explains why a looming financial meltdown may be far worse than anyone expects.

The Cato Institute has released its 2014 Annual Report, which documents a dynamic year of growth and productivity. “Libertarianism is not just a framework for utopia,” Cato’s David Boaz writes in his book, The Libertarian Mind. “It is the indispensable framework for the future.” And as the new report demonstrates, the Cato Institute, thanks largely to the generosity of our Sponsors, is leading the charge to apply this framework across the policy spectrum.

Search form

Tag: corporate tax rates

In a new column, Bruce Bartlett argues that U.S. corporate taxes are the lowest in the OECD, and therefore there is no need to reduce them. As usual, Bruce frames the debate as between sensible center-left economists like himself vs. crackpot Republicans. Yet on this issue, the great majority of serious tax scholars agree that a corporate tax rate cut is long overdue. Indeed, there is such broad agreement among experts that even the Obama White House is considering a corporate rate cut.

Bruce offers only weak and deceptive data in support of his views:

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s.

This statistic does not show what Bruce pretends it shows. Corporate income taxes are paid by a subset of businesses called “C” corporations. But the share of total U.S. business income reported by C corporations has plunged in recent decades with the rise in other business structures, particularly LLCs and S corporations.

In a 2007 article in Tax Notes, PwC economist Peter Merrill showed that the share of total U.S. business income reported by C corporations fell from 71 percent in 1987 to just 49 percent by 2004. C corporations are less important business structures than they used to be, so it is to be expected that corporate taxes as a share of GDP has fallen.

Another way to see the relative decline in C corporations is to look at the ratio of C corporation revenues to GDP. In 1980, for example, C corporation revenues were more than two times larger than GDP ($6.1 trillion to $2.8 billion), but by 2008 C corporation revenues were only about 1.5 times larger than GDP ($22 trillion to $14 trillion). (Revenues from the IRS corporate report for those two years).

Bruce’s centerpiece is a table showing that U.S. corporate taxes as a share of GDP were 1.8 percent in 2008, a lower share than in other OECD countries. But the rise in LLCs and S corporations in the United States makes this table almost useless in furthering Bruce’s argument. C corporations may simply represent a smaller share of the overall economy in the United States than in other countries. To make his point, Bruce would need to show that taxes as a share of corporate profits are lower in the United States than elsewhere.

If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate.

The effective tax rate Bruce refers to is the average effective rate, which is the rate he calculates in the faulty manner of taxes as a share of GDP. However, marginal effective rates are generally considered to be more important for international competitiveness. When Toyota is considering expanding its North American production at one of its U.S. or Canadian locations, it will look at the marginal effective tax rate in the two countries. And when it comes to marginal effective corporate tax rates, the United States has one of the highest rates in the world, according to a Cato study by tax scholars Jack Mintz and Duanjie Chen.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low.

Actually, statutory corporate tax rates are extremely important in the modern global economy because of the high mobility of corporate profits. In general, marginal effective tax rates drive real investment flows, but statutory corporate rates drive cross-border movements of reported income. Politicians frequently express their outrage at corporations pushing their profits offshore through transfer pricing and other techniques, but they could fix the problem anytime they wanted by slashing the uniquely high U.S. statutory corporate rate.

This brings us back again to Bruce’s statistic that U.S. corporate taxes as a share of GDP are low at just 1.8 percent. Another reason that figure is low is that the high U.S. statutory rate is pushing reported income offshore through avoidance and evasion. If we cut the statutory corporate rate, the apparent low burden that Bruce points to would increase. This chart shows the inverse relationship between statutory corporate taxes and corporate taxes as a share of GDP.

By the way, if the importance of statutory corporate rates were “blown far out of proportion” as Bruce says, then why has every other advanced economy put so much effort into reducing its statutory rate over the last two decades? The answer is that liberal, centrist, and conservative governments around the world have understood that a country imposing a high statutory corporate rate shoots itself in the foot in today’s competitive world economy.

To sum up:

The U.S. has a low average effective corporate rate when measured incorrectly as a share of GDP, as Bruce does. The low rate results from the relative decline in C corporation business activity, the high U.S. statutory rate driving profits offshore, and the high U.S. marginal effective rate suppressing real investment.

The U.S. has one of the highest marginal effective corporate tax rates in the world according to some calculations, which likely reduces U.S. capital investment substantially. After all, “corporate taxes are the most harmful type of tax for economic growth,” according to the OECD.

I testified to the Senate Finance Committee today regarding taxes and small business. My testimony is posted here.

President Obama plans to raise the top two individual income tax rates. That will not be good for business or the economy. A little more than half of all business income in the United States is reported on individual returns, not corporate returns. Of the business income reported on individual returns, 44 percent is in the top two income tax brackets.

My testimony pointed out that while Congress cut the top individual rate by 5 percentage points this past decade, the average top rate in the 30 OECD countries also fell by 5 percentage points, as shown in the chart below.

If the top federal rate rises to 40 percent next year, the United States will have the ninth highest top individual rate in the OECD, including state-level taxes. We’ve already got the second-highest corporate tax rate in the OECD.

A nation that has been a relative bastion of market capitalism and individual achievement has a tax code that is becoming very hostile to high-earners, entrepreneurs, and businesses of all types.